Risky investments weigh on colleges’ cash burdens

As tough economic times hit colleges across the state many will turn to their endowments to help them through the global fiscal crisis.

But an analysis of financial reports filed by universities and colleges in the region shows much of their investments are increasingly weighted toward alternative assets — a class of hedge funds, private equity funds and other investment vehicles that in the past offered big returns but can be difficult to quickly convert to cash.

That overweighting has come despite colleges’ attempts to keep their investment portfolios balanced with a healthy mix of traditional investment options such as mutual funds, stocks and bonds. However, the free fall in the stock and bond markets has thrown those preferred asset allocations out of whack, causing portfolios to be more heavily weighted toward less predictable assets, according industry experts and recent endowment filings.

And there’s little that can done in the current market to correct that balance, as holdings in alternative asset classes are notoriously difficult to quickly liquidate, experts said.

Tufts University, which saw its net investment return drop by more than 12 percent between July 1 and Sept. 30, had about $1.3 billion in alternative investments such as hedge funds, private equity funds, real estate and other private-fund classes, according to a disclosure made in a $83.4 million bond offering last month.

Those holdings equaled 72 percent of Tufts’ total $1.8 billion in investments. The National Association of College and University Business Officers says the average percentage of alternatives, relative to total investments, is closer to 40 percent for colleges.

Tufts declined repeated requests for an interview.

An October report from Moody’s Corp. (NYSE: MCO) cited Tufts’ growing exposure to hedge funds, along with its increasing dependence on endowment spending, as a concern. Tufts had another $257 million in unfunded commitments to alternative investment arrangements that can be called through 2018.

Likewise, Northampton-based Smith College, which saw a 15 percent drop in endowment returns from July through October, had 31 percent of its holdings in alternative equities and 29 percent in private equity and real assets, according to its recent annual report.

Smith didn’t respond to calls.

Like the stock and bond markets, private equity and hedge funds have been hit hard in recent months — and so have investors in those vehicles.

Worcester Polytechnic Institute recorded a loss of about $5.9 million in a single hedge fund investment when it had to sell its holdings to another fund, according to the institute’s 2008 financial statement. WPI held $160 million in alternative investments — roughly 41 percent of its $384 million investment portfolio — as of June 30.

But as the more liquid stock and bond markets are walloped, there’s little investment managers can do to correct over-allotments in alternative assets, given their liquidity issues and the fact that selling off hedge funds can punish the value of other similar holdings, experts said. Making matters worse: Many endowments are committed to push even more money into limited partnerships.

Another option to correct those allocations would be to raise new money through donors, but “this is the wrong time to go fundraising,” said Stephen Dimmock, a finance professor at Michigan State University.

And colleges will likely up spending from their endowments as they wade through tough times. For example, Smith will likely increase endowment spending from 4.5 percent to 6 percent.

Cristian Tiu, a professor of finance at State University of New York at Buffalo, said that since current endowment spending is based usually based on the strong investment returns of the past, those outlays will represent a larger slice of a diminishing pie.